Test Your Knowledge on Loss Aversion Theory

Loss Aversion Theory:

• Loss aversion refers to how people respond more strongly to losses than equivalent gains.

• Losses can be twice as powerful, psychologically, as gains.

• Loss aversion was first proposed by Amos Tversky and Daniel Kahneman as an important framework for Prospect Theory.

• Loss aversion is part of prospect theory, which is a cornerstone in behavioral economics.

• The endowment effect is explained by loss aversion - people place a higher value on a good that they own than on an identical good that they do not own.

• Multiple studies have questioned the existence of loss aversion.

• Loss attention refers to the tendency of individuals to allocate more attention to a task or situation when it involves losses than when it does not involve losses.

• Loss attention is consistent with several empirical findings in economics, finance, marketing, and decision making.

• Loss attention is more robust than loss aversion.

• Loss arousal is a phenomenon where individuals display greater Autonomic Nervous System activation following losses than following equivalent gains.

• Loss aversion is often applied in the fields of finance and insurance.

• Loss aversion has been used to explain many phenomena in traditional choice theory.Loss Aversion: A Detailed Summary

• The out of pocket phenomenon shows that people are more motivated to avoid losing personal resources than gaining equivalent resources.

• Marketing studies indicate that products with minor negative features highlighted are perceived as more attractive.

• Capuchin monkeys also exhibit the same propensity to avoid perceived losses demonstrated by human subjects and investors.

• Expectation-based loss aversion is a phenomenon in behavioral economics where individuals lose an amount of utility from the lack of experiencing fulfillment of their expectations.

• Loss aversion experimentation has been applied within an educational setting in an effort to improve achievement.

• Neural aspect of loss aversion can be measured using functional magnetic resonance imaging (fMRI) to investigate whether individual variability in loss aversion is reflected in differences in brain activity through bidirectional or gain or loss specific responses.

• Multiple neural mechanisms are recruited while making choices, showing functional and structural individual variability.

• Individual differences in loss aversion are related to variables such as age, gender, and genetic factors affecting thalamic norepinephrine transmission, as well as neural structure and activities.

• Adolescents and adults are found to be similarly loss-averse on the behavioral level but they demonstrated different underlying neural responses to the process of rejecting gambles.

• Loss of striatal dopamine neurons is associated with reduced risk-taking behavior.

• Acute administration of D2 dopamine agonists may cause an increase in risky choices in humans.

• Loss aversion can be exploited in the pursuit of both optimal public policy and the pursuit of profits.